OCCLUDED GAS LEASE

Exhibit 10(f):

 

OCCLUDED GAS LEASE

 

by and between

UNITED STATES STEEL CORPORATION,

Lessor

And

TAURUS EXPLORATION, INC.,

Lessee

January 1, 1986

TABLE OF CONTENTS

 

 

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OCCLUDED GAS LEASE

This Occluded Gas Lease (“Lease”) is made and entered into as of the 1st day of January, 1986, by and between UNITED STATES STEEL CORPORATION, a Delaware corporation (“Lessor”), and TAURUS EXPLORATION, INC., a Delaware corporation, (“Lessee”).

WITNESSETH:

ARTICLE 1

DEFINITIONS

As used in this Lease, the following terms shall have the meanings ascribed thereto:

1.1 Btu: one British Thermal Unit..

1.2 MMBtu: one million British Thermal Units

1.3 Developed Acreage: those portions of the Leased Premises that have been identified from time to time pursuant to Article 12.8.

1.4 Development Commitment Price: with respect to any year, the amount of the Wellhead Price that would be in effect on July 1 of said year if calculated pursuant to Article 1.22(a), substituting “July 1” for “January 1” in said Article each time it appears. For purposes of this calculation, the OCD-2 Rate in effect as of the date of the adjustment shall be the OCD-2 Rate in effect on such date without regard to any retroactive adjustments

 

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1.5 Gross Heating Value: the number of Btu’s contained in one cubic foot of Occluded Gas saturated with water vapor and adjusted on a dry basis to 14.73 psia.

1.6 Initial Unit Investment: with respect to each Payout Unit, all reasonable costs incurred by Lessee in order to bring into production the wells included in the relevant Payout Unit, including (a) title work, drillsite location and preparation, (b) the drilling, testing, coring, coal analysis, logging, hydraulic fracturing, and equipping each well for production; and (c) a fair and reasonable allocation (not to exceed 90%) of the cost of building access roads. Other common utilities such as power lines will be allocated based on planned useage requirements. Costs chargeable to the Initial Unit Investment shall cease to accrue for each well within a Payout Unit as of the time the well commences production. In the case of a well judged not economical and abandoned before being brought into production, the cost of plugging will also be included in the Initial Unit Investment. All costs of the gathering, compression, treatment, and distribution systems are specifically excluded from the Initial Unit Investment.

1.7 Lease: this contract between Lessor and Lessee.

1.8 Leased Premises: all those certain lands situated in Jefferson and Tuscaloosa Counties, Alabama, containing a total of 124,000 acres, more or less, described in Exhibit A-l, and further identified on Exhibit A-2, both attached hereto and incorporated herein, limited to a depth of 80 feet below the base of the Black Creek Group Coal Seams as formed in and under such lands, which seams are more specifically identified on Exhibit D attached hereto and incorporated herein. The Leased Premises are contained within the area generally described on the map attached as Exhibit B-1.

1.9 Net Profits: with respect to each Payout Unit, an amount equal to the Average Wellhead Price multiplied by the quantity of Occluded Gas produced less applicable Operating Costs, royalties and those severance taxes paid by Lessee with respect to which no deduction is made against Lessor’s royalties pursuant to Article 8.

1.10 Oak Grove Mine Area: that portion of the Leased Premises designated “Oak Grove Mine Area” on Exhibit B-1, attached hereto and incorporated herein.

1.11 Occluded Gas: “occluded natural gas produced from coal seams” as referred to in Section 107(c)(3) of the Natural Gas Policy Act of 1978 and the Regulations promulgated by the Federal Energy Regulatory Commission (FERC) pursuant thereto as such Regulations may be amended from time to time, provided however, that gob gas shall not be deemed to be Occluded Gas for purposes of this Lease.

1.12 OCD-2 Rate: the total commodity rate from time to time in effect for gas delivered under rate schedule “OCD-2” or its successor rate schedule, as published in the FERC Gas Tariff of the Southern Natural Gas Company. Except as expressly provided herein to the contrary, all payments, accounts or determinations based upon the OCD-2 Rate as of a specific date shall, in the

 

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case of a retroactive adjustment to the OCD-2 Rate, be likewise adjusted to account for such retroactive adjustment. Should Southern Natural Gas Company discontinue the publication of the OCD-2 rate and its successor rate schedules, Lessor and Lessee shall meet to agree on an appropriate method by which the Wellhead Price then in effect and Treatment Factor then in effect will thereafter be adjusted.

1.13 Operating Costs: with respect to each Payout Unit, all reasonable costs incurred in operating and maintaining the relevant Payout Unit, including (a) the costs of complying with applicable local, state, and federal statutes, ordinances, rules, and regulations pertaining to the well operations; (b) all costs of lifting and producing Occluded Gas; (c) all costs incurred in connection with the workover or other remedial servicing of all wells drilled on the relevant Payout Unit; (d) all utility costs and ad valorem and production taxes directly associated with the well operations; (e) a fair and reasonable allocation (not to exceed 90%) of maintenance costs for access roads with such costs for other common utilities being based on actual usage; and (f) the costs of plugging and abandoning uneconomical wells to the extent not included in the Initial Unit Investment. Operating costs for each well within a Payout Unit will start when the well commences production. All costs of the gathering, compression, treatment, and distribution systems are specifically excluded from the Operating Costs. Also specifically excluded are all costs of interest, depletion, depreciation, and income taxes.

1.14 Operations: as defined in Section I.1. of Exhibit C.

1.15 Payout: that point in the production life of a Payout Unit when cumulative Net Profits equal 165% of the Initial Unit Investment.

1.16 Payout Unit: all wells spudded within a single calendar year.

1.17 Pooled Unit: as defined in Article 11.

1.18 Primary Term: the initial eight years of this Lease (January 1, 1986 through December 31, 1993).

1.19 psia: pounds per square inch, absolute.

1.20 Treatment Factor: the amount of $0.78 per MMBtu or such other amount that is in effect from time to time, adjusted: (a) as of January 1 of each year beginning January 1, 1987 upward by 20% of the difference between (1) 95% (to read 100% until the expiration of the first 5 years of this Lease or until Article 1.22(a)(i)[2] comes into effect, whichever comes first) of the OCD-2 Rate in effect as of said date and (2) the sum of the Wellhead Price under Article 1.22(a) and the Treatment Factor, both as in effect on the day prior to the adjustment; provided however, that the cumulative amount of all such increases shall not exceed $.01 per MMBtu times the number of years elapsed between the commencement of this Lease and date of the adjustment; and (b) as of the first day of each

 

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month shall be adjusted by 5.5% of any increase or decrease in the Average Wellhead Price in effect for production from the immediately preceding month as compared to the Average Wellhead Price in effect for production from the second preceding month; in no case, however, shall the Treatment Factor be reduced other than as a result of this 1.20(b).

1.21 Undeveloped Acreage: that portion of the Leased Premises that is not Developed Acreage.

1.22 Wellhead Price:

 

(a)

For Occluded Gas sold or transferred to an entity that is within the Energen group of related companies or that is a parent, subsidiary or affiliate of the Lessee, for Occluded Gas that is produced but not sold or transferred, and for Occluded Gas that is sold or transferred other than under conditions described in Article 1.22(b) below:

 

(i)

From the commencement of this Lease through December 31, 1990:

 

[1]

The Wellhead Price shall be $2.60 per MMBtu, or such other amount that is in effect from time to time, adjusted as of January 1 of each year beginning January 1, 1987, upward by 80% of the difference between (A) the OCD-2 Rate in effect as of said date and (B) the sum of the Wellhead Price under Article 1.22(a) and the Treatment Factor, both as in effect on the day prior to the adjustment; provided however, that the cumulative amount of all such increases shall not exceed $.04 per MMBtu times the number of years elapsed between January 1, 1986 and the date of the adjustment, and further provided that, if the Wellhead Price under this Article 1.22(a)(i)[1] is above $2.45 per MMBtu, it shall not exceed the OCD-2 Rate less Treatment Factor at the dates of adjustment, but in any case it shall not be less than $2.45 per MMBtu.

 

[2]

Notwithstanding the preceding Section [1], if at any time the OCD-2 Rate less Treatment Factor equals or exceeds 150% of the Wellhead Price defined in Article 1.22(a)(i)[1], the Wellhead Price shall thereupon become and thereafter be calculated as (A) 95% of the OCD-2 Rate less (B) the Treatment Factor, using said amounts that are from time to time in effect.

 

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(ii)

After December 31, 1990: The Wellhead Price shall be calculated as (A) 95% of the OCD-2 Rate less (B) the Treatment Factor, using said amounts that are from time to time in effect.

 

(b)

For Occluded Gas sold or transferred to a bona fide third-party purchaser not affiliated with Lessee, pursuant to a sales contract arrived at through good faith, arm’s length negotiations and through which no entity is intending to take unfair advantage of the Lessor:

The Wellhead Price shall be the price required to be paid under said sales contract, provided however that if the price stated in said sales contract includes transportation of the Occluded Gas beyond the wellhead, the Wellhead Price shall be the price required to be paid under said sales contract less the lesser of (i) the amount included in the sales contract that is intended to be compensation for the transportation services or (ii) the Treatment Factor then in effect.

1.23 Average Wellhead Price: the average of the Wellhead Prices for Occluded Gas calculated according to Articles 1.22(a) and 1.22(b), weighted according to the volumes of Occluded Gas produced subject to each of said Wellhead Prices during the month in question.

1.24 Restricted Areas: that portion of the Leased Premises from time to time designated by Lessor as Restricted Areas pursuant to Article 12.11.

ARTICLE 2

GRANTING CLAUSE

2.1 Subject to the further terms hereof and subject to the limitations herein contained, and in consideration of the royalties herein provided and the agreements of Lessee herein contained, Lessor hereby grants, leases and lets unto Lessee the Leased Premises for the sole purpose of investigating, exploring, prospecting, drilling for, and producing Occluded Gas, together with the right to make surveys on said land, establish and utilize facilities for the disposal of water in accordance with applicable laws and regulations, to install, build, operate and maintain roads, pipelines, power lines, telephone lines, compressor facilities and other structures thereon as may be necessary to produce, take care of, treat, transport, and own said Occluded Gas.

(a) Unless expressly stated to the contrary, the rights granted by this Lease shall extend only as necessary for the production and marketing of Occluded Gas occurring within the Leased Premises, and only to the extent of Lessor’s right to grant said rights.

 

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(b) As to any tracts within the Leased Premises on which Lessor does not own the surface, Lessee shall be responsible for making any arrangements with the owners of the surface rights at Lessee’s sole expense. Lessee shall hold Lessor harmless against losses of any nature arising out of suits or claims by owners or alleged owners of surface rights which suits or claims are based on Lessee’s actions under said arrangements or this Lease.

2.2 Lessor excludes from this Lease all oil, gas (the word “gas”, as used herein, shall mean and include any gaseous substance except Occluded Gas, whether combustible or noncombustible, including by way of illustration but not by way of limitation, hydrogen sulfide) gob gas, condensate, distillate and sulfur found above, below, or within coal seams occurring within the Leased Premises.

2.3 Except for the rights granted to Lessee hereunder to commercially develop and produce Occluded Gas, which rights are exclusive except as to:

(a) gas produced from wells that are subject to the gas sales agreement between Southern Natural Gas Company and Lessor dated July 6, 1981, as amended;

(b) rights granted under, and operations and activities conducted pursuant to, that certain agreement between the Gas Research Institute (“GRI”) and Lessor dated March 1, 1984, as amended, the land subject to which is shown as Restricted Area on Exhibit B-2; and

(c) gas produced pursuant to the Coal Seam Gas Drainage Agreement between Methane Drainage Ventures and Lessor dated February 25, 1985, as amended; Lessor expressly reserves all rights with respect to the surface and subsurface of the Leased Premises for any and all purposes, including without limitation: ingress and egress; mining coal, whether or not said coal has been developed for the production of Occluded Gas; venting Occluded Gas from coal, whether by drilling or otherwise, for purposes other than the commercial production of same; conducting geological and other surveys; selling, leasing, or otherwise transferring interests in the Leased Premises; harvesting, storing, transporting and replanting timber; and exploring for, drilling, mining, producing, treating, storing and transporting any and all minerals, coal, oil and gas and surface materials other than those Leased hereunder, whether or not said activities involve the disturbance or destruction of coal seams.

2.4 The rights of Lessee hereunder shall be subject to all other rights, uses and easements affecting the Leased Premises, whether now existing or hereafter granted, and Lessee’s use of the Leased Premises shall not unreasonably interfere with such other rights, uses and easements.

 

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2.5 If Lessee discovers gas other than Occluded Gas in the Leased Premises as a result of its bona fide operations under this Lease to develop and produce Occluded Gas, the parties shall enter into good faith negotiations to grant Lessee a lease that would provide Lessee the right to develop, operate and produce the reserve of gas so discovered.

ARTICLE 3

TERM

3.1 Unless sooner terminated or longer kept in force under other provisions hereof, this Lease shall be in effect for a Primary Term of eight (8) years from the date hereof and thereafter (a) with respect to the Developed Acreage, for as long as Occluded Gas is produced in paying quantities, and (b) with respect to the Undeveloped Acreage, for as long as royalties are paid in accordance with Article 5.2.

3.2 Except as provided in Article 11 regarding Pooled Units, Lessee may, at any time, release all or any portion of the Undeveloped Acreage from the terms of this Lease by giving Lessor written notice of said action.

ARTICLE 4

ROYALTIES

4.1 Lessee covenants and agrees to pay to Lessor a royalty on all Occluded Gas produced from each Payout Unit on the Leased Premises as follows:

 

(a)

Prior to Payout:

one-tenth (1/10) of the Average Wellhead Price;

 

(b)

After Payout:

 

(i)

Lessor shall have the option of continuing to receive the royalty provided in Article 4.1(a) above or four-tenths (4/10) of the Net Profits.

 

(ii)

Lessor shall evidence its election whether to exercise such option as to each Payout Unit by written notice to Lessee during the thirty-day period immediately following receipt from Lessor of a notice of Payout. The failure of Lessor to provide Lessee with written notice of its election during the thirty-day period shall constitute an election by Lessor to retain its one-tenth (1/10) royalty interest in the relevant Payout Unit. If Lessor elects to convert its royalty for any Payout Unit to four-tenths (4/10) of the Net Profits, the royalty provided in Article 4.1(a) above shall cease and terminate, as to such Payout Unit and such conversion shall become effective, as of the first day of the month following the month in which Payout occurred.

 

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(iii)

If the calculation of Net Profits results in a negative number (“Net Losses”) during any royalty period for any Payout Unit as to which Lessor has elected a royalty of four-tenths (4/10) of Net Profits, royalty for said Payout Unit shall be zero for said royalty period. Net Losses shall not be netted with royalties or Net Profits from other Payout Units and Lessor shall not be required to share said Net Losses in any way except that Lessor may accumulate said Net Losses with Net Profits from the same Payout Unit for subsequent royalty periods for the purpose of calculating royalties payable with respect to said subsequent royalty periods.

4.2 Notwithstanding the provisions of Article 4.1 (Royalties) and Article 7 (Measurement of Occluded Gas), royalty shall not accrue upon and Lessee need not measure any Occluded Gas that must be vented or flared. Lessee shall vent or flare Occluded Gas rather than shutting in any wells in areas that Lessor may from time to time designate, for purposes of degasifying coal that is mineable. Lessee may vent or flare Occluded Gas in any of its operations hereunder as it deems appropriate, consistent with good operating practice.

ARTICLE 5

DEVELOPMENT OF LEASED PREMISES;

DELAY RENTAL; MINIMUM ROYALTY

5.1 During the Primary Term, Lessee shall develop the Leased Premises as follows:

 

(a)

During any year in which the Development Commitment Price is $2.60 or more per MMBtu, Lessee will drill, complete (including hydro-fracturing) and test (including attempted de-watering) a minimum of thirty wells.

 

(b)

During any year in which the Development Commitment Price is $2.45 or higher but less than $2.60 per MMBtu, Lessee will drill, complete (including hydro-fracturing) and test (including attempted de-watering) a minimum of twenty wells.

 

(c)

During any year in which the Development Commitment Price is less than $2.45 per MMBtu, Lessee will not be obligated to develop the Leased Premises. If under the provision of this Article 5.1(c) Lessee does not drill, complete (including hydro-fracturing) and test (including attempted de-watering) at least

 

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twenty wells, Lessee shall pay Lessor for each such year, as delay rental, $1.00 per Undeveloped Acre held under this Lease at the end of such year. Lessee at its option may however expend up to fifty (50%) percent of said delay rental on an exploration drilling program that is mutually agreed upon by the parties and conducted during the year in question, in lieu of paying said portion of the delay rental to Lessor.

 

(d)

As to any year in which the Development Commitment Price is less than $2.45 per MMBtu, Lessor shall have the option of reinstating the development commitment specified in Article 5.1(b) by decreasing its royalty for the period July 1 through June 30 during which said Development Commitment Price is in effect by an amount equal to the difference between $2.45 per MMBtu and said Development Commitment Price.

 

(e)

Lessee shall notify Lessor of the Development Commitment Price not later than July 15 of each year, and Lessor shall have 15 days thereafter to exercise the option contained in Article 5.1(d). Failure of Lessor to timely exercise such option shall be deemed an election against exercising such option for the year in question.

5.2 After the Primary Term, Lessee shall continue to abide by the obligations set forth in Article 5.1 or pay an annual minimum royalty equivalent to the royalty that would be paid on annual production volume of 4 million cubic feet per day at the royalty rate in effect pursuant to Article 1.22(a) as though all of said annual production volume had been produced on December 31 of the year in question. Said annual minimum royalty shall not be reduced by reason of release of less than 100% of any Undeveloped Acreage being held under the Lease. Any part of such payment not attributable to current production shall be considered advance royalty and shall be recoverable in the two years following, dollar-for-dollar against royalties due Lessor in either of said years over and above any minimum royalty obligation applicable to said years.

ARTICLE 6

PAYMENTS

All royalty payments shall be made on a monthly basis and delay rental and minimum royalty payments on an annual basis by Lessee to Lessor in accordance with the following:

6.1 Each payment shall be made by check payable to Lessor.

6.2 Each payment shall be received by Lessor on or before the appropriate due date:

 

(a)

Due date for royalty payments shall be the last day of the month following the calendar month in which the Occluded Gas is produced.

 

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(b)

Due date for delay rental and minimum royalty payments shall be the 30th day following the end of the the calendar year for which payment is made.

6.3 Each payment shall be accompanied by a report referring to this Lease, specifying the Payout Unit and wells for which payment is made, and detailing the calculation used to determine the amount of the payment.

6.4 Each payment shall be made to Lessor at the following address or at such other address as Lessor may from time to time specify in writing for such purpose:

Manager-Southern Lands & Minerals

United States Steel Corporation

P. O. Box 599, B-100

Fairfield, AL 35064

Lessor shall give Lessee at least thirty (30) days written notice of any change in the address at which payments shall be made to Lessor.

6.5 Late payments shall bear interest compounded daily at the annual prime rate of interest in effect at Chase Manhattan Bank, N.A. on the due date of the delinquent payment.

ARTICLE 7

MEASUREMENT OF OCCLUDED GAS

7.1 The unit of volume for measurement of the Occluded Gas produced hereunder shall be one (1) cubic foot of gas at a base temperature of sixty (60) degrees Fahrenheit and at an absolute pressure of fourteen and seventy-three hundredths (14.73) psia. All fundamental constants, observations, records and procedures involved in determining and/or verifying the quantity and other characteristics of gas delivered hereunder, unless otherwise specified herein, shall be in accordance with the standards prescribed in Report No. 3 of the American Gas Association (AGA) as now and from time to time amended or supplemented. All measurements of Occluded Gas shall be determined by calculations in the terms of such unit. All quantities given herein, unless expressly stated, are in terms of such unit.

7.2 Lessee shall maintain and operate at its sole expense measuring stations located at each wellhead. Said measuring stations shall be equipped with turbine or rotary meters or other types of meters with totalizer as agreed to by Lessor and Lessee so as to accomplish the accurate measurement of volumes of Occluded Gas produced hereunder.

7.3 Lessor may at its option and expense install check meters for checking Lessee’s metering equipment and same shall be so installed as to not interfere with the operation of Lessee’s facilities.

 

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7.4 The specific gravity of the Occluded Gas flowing through the meter or meters shall be determined monthly by use of an AGA accepted gravitometer or by computing from fractional analysis of samples of the Occluded Gas taken at as many points as necessary to permit the calculation of an average specific gravity representative of all Occluded Gas produced hereunder. Specific gravity so determined will be used in calculating gas production for the month in which the tests are made.

7.5 The Gross Heating Value of the Occluded Gas shall be determined by taking continuous samples at as many points as necessary to permit the calculation of an average Gross Heating Value representative of all Occluded Gas produced hereunder. The sample may be run on a calorimeter or Gross Heating Value may be computed from fractional analysis of such sample. The result shall be applied to Occluded Gas produced during the month in which samples are taken.

7.6 Each party shall have the right to be present at the time of any installation, reading, cleaning, changing, repairing, inspecting, calibrating or adjusting done in connection with the other’s measuring equipment used in measuring deliveries hereunder. The records for such measuring equipment shall remain the property of the Lessee and shall be kept on file for a period of two (2) years, but upon request, each will submit to the others its records and charts, together with calculations therefrom subject to return within fifteen (15) days after receipt thereof. At least once each year Lessee shall calibrate the meters and instruments or cause same to be calibrated. Said meters shall be calibrated more frequently at any times inaccuracy is suspected. Lessee shall give Lessor sufficient notice in advance of such tests so that Lessor may, at its election, be present in person or by its representative to observe adjustments, if any, which are made. For the purpose of measurement and meter calibration, the atmosphere pressure shall be assumed to be fourteen and four-tenths (14.4) psia, irrespective of variations in natural atmospheric pressure from time to time.

7.7 If upon any test the metering equipment in the aggregate is found to be inaccurate by two percent (2%) or more, registration thereof or any payment based upon such registration shall be corrected at the rate of such inaccuracy for any period of inaccuracy which is definitely known or agreed upon, or if not known or agreed upon, then for a period extending back one-half of the time elapsed since the previous calibration. Following any test, any metering equipment found to be inaccurate to any degree shall be adjusted immediately to measure accurately. If for any reason any meter is out of service or out of repair so that the quantity of Occluded Gas delivered through such meter cannot be ascertained or computed from the readings thereof, the quantity of Occluded Gas so delivered during such period the same is out of service or out of repair shall be estimated and agreed upon by the parties hereto upon the basis of the best available data, using the

 

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first of the following methods which is feasible.

 

(a)

By using the registration of any check measuring equipment of Lessor if installed and registering accurately.

 

(b)

By correcting the error if the percentage of error is ascertained by calibration tests or mathematical calculation.

 

(c)

By estimating the quantity of deliveries by deliveries during preceding periods under similar conditions when the meter was registering accurately.

7.8 The measurement hereunder shall be corrected for deviation from Boyles’ Law at the pressure and temperatures under which Occluded Gas is delivered hereunder.

ARTICLE 8

TAXES

Lessee shall pay all taxes levied on the production, use, or sale of Occluded Gas produced from the Leased Premises, severance taxes and all taxes on the receipts therefrom or taxes due by reason of Lessee’s activities on the Leased Premises of whatever nature or kind, either Federal or State, or any subdivision thereof. Lessee shall pay ad valorem taxes levied upon its interest in the Leased Premises and on all of its improvements, fixtures and equipment. Lessor shall pay the ad valorem taxes levied upon its interest in the Leased Premises and one-tenth (1/10) of the severance taxes may be deducted by Lessee from royalties paid to Lessor for that Occluded Gas as to which royalties are paid on the basis of one-tenth (1/10) of the Average Wellhead Price.

ARTICLE 9

WATER

Lessee may with prior written consent of Lessor and at no additional cost to Lessor use non-potable water for its operations hereunder from any well, tank, reservoir or other watering place owned by Lessor. Such consent shall not be unreasonably withheld; fear of adverse labor consequences, in the sole opinion of Lessor, shall be deemed just cause for withholding such consent.

ARTICLE 10

DRAINAGE

Lessee agrees to drill such well or wells as would a reasonably prudent operator under the circumstances in order to protect the Leased Premises from drainage.

ARTICLE 11

POOLING

11.1 Lessee, with Lessor’s prior written consent, may pool or combine the Leased Premises with any other land, leased or owned by Lessee, which is contiguous or in the same block with

 

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the Leased Premises to establish drilling units for the production of Occluded Gas. If expansion of the drilling unit is required or permitted under any governmental rule or order for operations in connection with the production of Occluded Gas, or for obtaining the maximum allowable, any such drilling unit may, on Lessor’s prior written consent, be reformed to conform to the size so required or permitted. Lessee shall exercise the privilege to pool or combine land as to each drilling unit by executing the appropriate permit application forms and sending copies of same to Lessor with a request that the drilling so designed be approved within 15 days of receipt and, thereafter, Lessee shall file said application with the appropriate regulatory authority. Lessee, with Lessor’s prior written consent, may unitize one or more drilling units in accordance with the terms and conditions of Section 9-17-80 et seq., Code of Alabama (1975), pertaining to Unit Operations. Notwithstanding any other provision herein contained, after the expiration of the Primary Term hereof, operations on or production from a drilling unit or a unitized area or areas established under this Article 11 shall maintain this Lease in force only as to the land included in such drilling unit or unitized area or areas. Upon the pooling and/or unitization of less than all of the Leased Premises, this Lease shall be severed and considered as separate and distinct Leases. The Lease term and all the rights and obligations of the Lessee under this instrument shall apply separately to the pooled and unpooled acreage. A Pooled Unit established hereunder shall be unitized acreage as compared to the non-pooled and non-unitized acreage.

11.2 Any operations conducted on any part of such a drilling unit or unitized area shall be considered, for all purposes, to be operations conducted upon the Leased Premises. There shall be allocated to the Leased Premises within each drilling unit that proportion of the total production of Occluded Gas from the relevant drilling unit, that the number of surface acres in the portion of the Leased Premises included within such drilling unit bears to the total number of surface acres in such drilling unit or unitized area, and the production so allocated shall be considered for all purposes, including payment of royalty to be production of Occluded Gas from the land to which allocated in the same manner as though produced therefrom under the terms of this Lease. The same proportionate share shall be applied to determine:

 

(a)

that portion of the development costs for the drilling unit that are deemed to be part of the Initial Unit Investment;

 

(b)

that portion of the Operating Costs for the drilling unit that are attributable to the Payout Units; and

 

(c)

that portion of each well on the drilling unit that will be counted toward satisfaction of the development obligation set forth in Article 5.

 

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11.3 The formation of any drilling unit or unitized area hereunder which includes lands other than the Leased Premises shall not have the effect of exchanging or transferring any interest under this Lease between parties owning interests in the Leased Premises and parties owning interests in lands other than the Leased Premises. Neither shall it impair the right of a party to release or terminate this Lease as to all or any portion of the Leased Premises, except that Lessee may not so release as to any portion of the Leased Premises included within a drilling unit or unitized area while there are operations thereon for, or production of Occluded Gas therefrom unless all pooled and/or unitized leases are released as to all lands within the relevant drilling unit or unitized area. At any time while this Lease is in force, Lessee may dissolve any drilling unit or unitized area established hereunder by given written notice to Lessor, if at that time there is no production of Occluded Gas from the relevant drilling unit or unitized area and operations are not being conducted thereon for Occluded Gas. Subject to the provisions of this Article 11, a drilling unit or unitized area once established hereunder shall remain in force so long as any lease subject thereto shall remain in force.

11.4 If this Lease now or hereafter covers separate tracts, no pooling or unitization of royalty interests as between any such separate tracts is intended or shall be implied or result merely from the inclusion of such separate tracts within this Lease, but Lessee shall nevertheless have the right to pool or unitize as provided in this Article 11 with the consequent allocation of production as herein provided. As used in this Article 11.4, the term “separate tract” means any tract with royalty ownership differing, now or hereafter, either as to parties or amounts, from that as to any other part of the Leased Premises.

ARTICLE 12

OPERATIONS; COORDINATION OF ACTIVITIES

12.1 Lessor and Lessee shall from, time to time, meet to discuss their planned activities for the Leased Premises, and shall use their best efforts to coordinate their operations and activities in such a manner that neither party shall unreasonably interfere with other operations and activities which may then or in the future be conducted on the Leased Premises. In any case, however, the rights reserved hereunder to Lessor on the Leased Premises shall take precedence over the rights of Lessee hereunder, except to the extent otherwise expressly provided herein.

12.2 Lessee shall conduct recovery operations, including hydro-fracturing to recover Occluded Gas from all horizons and coal seams within each Payout Unit from which Occluded Gas can be economically recovered in Lessee’s sole judgment and shall develop the Leased Premises in an orderly manner to effectuate complete recovery of the Occluded Gas that can be economically recovered; provided however, that Lessee shall not produce from

 

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horizons below the Mary Lee-Blue Creek group within the Oak Grove Mine Area without the express, prior written consent of Lessor. Lessee shall endeavor to fully develop the Oak Grove Mine Area prior to concentrating its efforts on developing other portions of the Leased Premises.

12.3 On or before September 1 of each year during the term of this Lease, Lessee shall furnish Lessor with a map showing the approximate geographic areas in which activities or operations are planned for the following year.

12.4 (a) At least forty-five (45) days prior to the commencement of the drilling of any well or wells on the Leased Premises, Lessee shall notify Lessor in writing of the proposed well location or locations. If Lessor objects to the proposed location of any wells, Lessor shall notify Lessee within thirty (30) days. The two parties shall then consult and determine suitable locations for the well or wells.

(b) Lessee shall not construct or install wells, roads, pipelines, surface equipment or surface installations on the Leased Premises without obtaining Lessor’s prior written approval as to location and timing of construction and installation, which approval shall not be unreasonably withheld. At any time, Lessor may require Lessee to relocate any pipelines and surface facilities installed hereunder, all at Lessor’s expense.

(c) Lessee shall bury all permanent pipelines below the surface of the ground if they would otherwise interfere with Lessor’s use of the surface. Such pipelines shall be buried at least thirty (30) inches below the surface of the ground or at such greater depth as may reasonably be required by Lessor to accommodate the specific use of the surface contemplated by Lessor.

12.5 No well shall be drilled by Lessee within two hundred (200) feet of any residence, barn, building, or similar structure now or hereafter owned or used by Lessor, or Lessor’s tenants or others permitted by Lessor to be on the Leased Premises.

12.6 Each year during February, Lessee shall furnish Lessor with an updated survey and reproducible Mylar-type map(s) showing the location on the Leased Premises as established by a registered surveyor of all wells drilled and of all pipe lines, tanks, roads, and other facilities placed or constructed thereon by Lessee or under Lessee’s direction during the preceding calendar year.

12.7 (a) Upon Lessor’s request, Lessee shall provide to Lessor information about the stimulation techniques used on the Leased Premises. If Lessor determines that such stimulation is detrimental to Lessor’s interest in the coal seam, Lessor shall notify Lessee. Lessor and Lessee shall then consult and determine an appropriate stimulation technique or practice sufficient to protect the coal seam. For the Mary Lee and the Blue Creek seams within the Oak Grove Mine Area and for such other seams within the Leased Premises as may be designated by

 

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Lessor as being mineable, it shall be deemed an acceptable practice to hydraulically fracture said seams simultaneously using a total fluid volume up to 150,000 gallons per well and any volume above 150,000 gallons per well shall not be used without the prior written consent of Lessor. For simultaneous fracturing of said seams, fluid pumping rates shall not exceed thirty (30) barrels per minute and bottom-hole pressure shall not exceed 2500 psi except with the prior written consent of Lessor.

(b) If, in its good faith judgment as a prudent coal operator, Lessor determines that any operations pursuant to this Lease are detrimental to the present or future mineability of any mineable coal seams, whether such harm is physical or due to regulatory considerations, Lessor may require that no further operations of Lessee be conducted in the seams and areas affected without the prior written consent of Lessor.

12.8 Each year during February, Lessee shall furnish